OGMT – Feb 2020 – L1 – Q3 – Unitization and Redetermination

Explain the concepts of unitization and redetermination in the context of petroleum operations.

Question

a) Explain the following concepts

i. Unitization; and

ii. Redetermination.

b) ABC Limited has 40% and 30% interest in Costal Reef Petroleum Agreement and Deep Sea Petroleum Agreement respectively. The contract areas of the two Petroleum Agreements have been unitised for joint operation. It has been determined that the hydrocarbon present in the unitised area is in the proportion of 40% and 60% for the Costal Reef Contract Area and Deep Sea Contract Area respectively.

Gross production of crude oil in the unitised area in 2018 year is 500,000,000 barrels. The average price of crude oil that year is $50 per barrel.

Required:

Compute the gross income of ABC Limited for the 2018 year of assessment.

Answer

(a). (a) Unitisation – Unitisation refers to the joint development of a hydrocarbon reservoir which extends across two or more licence or contract areas in order to ensure the efficient production of the reservoir and to maximise the economic recovery of petroleum from such licences. Where during the appraisal of a discovery it is found out that a hydrocarbon reservoir straddles two licences, it is common in the industry that the licensees would agree to pool their resources to jointly exploit the reservoir. This avoids the duplication of infrastructure and well drillings to produce the same reservoir. Cost is thus reduced.

In some cases, the hydrocarbon reservoir cut across the borders of two countries. Where the licensees of each country agree to jointly exploit that reservoir, it is referred to as CrossBorder Unitization. The term Sole-Country Unitization is used to described unitisation which solely takes place in one country. That is where the hydrocarbon reserve straddles two licences in the same country.

(b) Redetermination – This is a process where the proportionate share of oil and gas initially determined to be in place in the contract area of each licence during unitisation is reassessed. As more data is obtained about the unitised field, it is common for the information derived to be used to re-determine the oil and gas in place in each contract area of the unitised field. This is an important principle because it allows for a more accurate allocation of costs and production between the parties to the unitisation agreement.

Hydrocarbon in Coastal Reef area of Unitised Area 40%

Hydrocarbon in Deep Sea area of Unitised Area 60%

ABC’s interest in Coastal Reef PA 40%

ABC’s interest in Deep Sea PA 30%

Oil Price per barrel $50

Proportionate Production from Coastal Reef and Deep Sea Areas Coastal Reef Area = (40 / 100 × 500,000,000) 200,000,000 barrels

Deep Sea Area = (60 / 100 × 500,000,000) 300,000,000 barrels

ABC Limited’s Gross Income: Income from Coastal Reef = (40 / 100 × 200,000,000 × $50) $4,000,000,000

Income from Deep Sea = (30 / 100 × 300,000,000 × $50) $4,500,000,000

ABC Limited’s Gross Income: $8,500,000,000

Tags: Crude Oil Price, Gross Income, Hydrocarbon Allocation, Petroleum Agreement, Unitization
Level: Level 1

Topic: Taxation of Revenue and Cost Streams
Series: FEB 2020

Uploader: Samuel Duah